3 Reasons Walmart’s Stock Is Fairly Valued

WMT stock - 3 Reasons Walmart’s Stock Is Fairly Valued

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Traditional retail giant Walmart (NYSE:WMT) is back. And it’s bigger, stronger and better than ever. WMT stock traded nearly 10% higher to $100 after the company reported what was arguably its best quarter in over a decade. Not only was it a double-beat-and-raise report, but Walmart comparable sales rose 4.5% in the U.S. (the best mark in over a decade).

What’s more: Sam’s Club comparable sales rose 5% (the best market in six years), e-commerce growth was 40% (the best mark in several quarters) and total revenue growth was 3.6% (also the best mark in several quarters while going against a tough lap).

Meanwhile, margins appear to be stabilizing, and the company lifted its full-year sales and profit guides.

Overall, Walmart’s quarter was really, really good. It underscored that Walmart is not only surviving but actually thriving in today’s retail landscape. Consequently, the big jump in Walmart shares, from $90 to $100, makes sense.

Further gains, however, will be tough to come by. Over the past several months, I’ve argued that the time to sell WMT stock was when it was above $100 in early 2018, and that the time to buy WMT was when it was in the $80s in July 2018.

Now, Walmart’s stock is back at $100, and I think the time to sell is right around the corner. Here’s a deeper look.

Walmart Reports Best Quarter In Years

By multiple measures, Walmart’s second quarter 2018 earnings report comprised the best numbers this company has reported in several years.

Not only did comparable sales growth at Walmart U.S. locations rise 4.5%, the best mark in over a decade, but that big growth was driven by sizable gains in both traffic (+2.2%) and average ticket (+2.3%). That is impressive. Not only is Walmart getting more people to shop at its locations, but they are doing so without sacrificing on price.

Growth also re-accelerated on the e-commerce side of things during the quarter. Walmart U.S. e-commerce sales growth rose 40% in the quarter. Remember, WMT took a beating in early 2018 because red-hot e-commerce sales growth dropped to 23% in the fourth quarter of 2017 (versus 50%-plus growth rates in the prior quarters). E-commerce growth didn’t really come roaring back in the first quarter of 2018 (+33%), so investors were starting to think that the best of the e-commerce tailwind was in the past for WMT stock.

Second quarter numbers put those fears to rest. E-commerce sales growth of 40% is robust, and more in-line with 2017’s sky-high rates than the past two quarter’s sluggish rates. Thus, it appears as though the long-term trend for Walmart’s e-commerce business remains positive.

Meanwhile, margins are still falling, but not by much because robust revenue growth is supporting higher opex without expanding the opex rate. Plus, higher average tickets are helping offset digital erosion on the gross margin line.

Overall, Walmart’s second quarter report was nothing short of spectacular. It featured some of the best growth rates this company has seen in years, while also suggesting that the worst of Walmart’s margin headaches are behind them. Indeed, because of the great report, WMT’s 10% pop feels fully warranted.

Beware of $100 for Walmart Stock

Overall, strong second-quarter numbers affirm my bullish long-term thesis on Walmart.

This is a company which has adjusted to today’s dynamic omnichannel retail world, is successfully defending share against Amazon (NASDAQ:AMZN), and is winning customers over through low prices and enhanced convenience. The more the company builds out omnichannel capabilities like delivery, and expands its product assortment to include groceries everywhere, the more Walmart’s consumer value prop will increase, and the better the numbers will get.

In other words, Walmart is winning today, and Walmart will stay winning for the foreseeable future.

But, that doesn’t make WMT stock a buy here and now. Instead, I’m cautious as Walmart shares approach $100 for three reasons.

  1. I feel that fair value on this stock rests somewhere between $100 and $110, so upside thereafter feels limited.
  2. WMT stock has tested the $100 before and failed to hold it.
  3. The valuation that supports a $100-plus price tag today is a 20X forward earnings multiple, which has historically been unsustainable.

For these reasons, I think the time to sell WMT stock is just around the corner. If this stock breaks above $100 and heads towards $110, I think the rally will have reached its peak in the near-term. That would be a good time to take profits off the table.

Bottom Line on WMT Stock

Walmart is back, and they are better than ever. But, WMT stock looks fully valued above $100. Thus, if this post-earnings rally carries WMT stock to prices above $100, that would be a good time to sell.

As of this writing, Luke Lango was long WMT and AMZN. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/08/walmart-earnings-wmt-stock-fair-value/.

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